Though the Senate will not consider the House-passed Build Back Better Act, there has been some discussion of reviving the legislation’s climate provisions as part of a new package which would also be designed to promote energy independence, reduce prescription drug costs, raise revenue and reduce deficits. The House-passed bill financed spending and tax breaks through a combination of tax increases on corporations and high earners, prescription drug savings and near-term borrowing (as well as arbitrary policy expirations).

In this analysis, we consider the implications of coupling the Build Back Better Act’s climate provisions with a carbon tax or another carbon pricing mechanism. We rely heavily on helpful modeling from Energy Innovation: Policy & Technology, a nonpartisan think tank. Put simply, we conclude that financing climate investments with a carbon tax could greatly improve their effectiveness in reducing emissions while leaving more revenue and spending offsets available to reduce deficits or fund other priorities.

Climate Provisions in the Build Back Better Act

The House-passed Build Back Better Act includes roughly $550 billion of spending and taxbreaks designed to support clean energy and reduce carbon emissions.

Approximately $325 billion of these provisions are on the tax side of the ledger. To support clean electricity and renewable energy, the BBB would extend and expand several existing tax credits through 2026 while creating a few new tax credits, and then transition to a new, technology-neutral tax regime through 2031. The plan also includes new and expanded tax credits to support the purchase of various types of electric vehicles and to promote energy efficient systems in homes and buildings.

The plan would also spend an additional $225 billion. It would reduce air pollution and emissions from buildings through grants for installing low-emissions technologies. It includes funding for soil conservation, restoration of forests and safe drinking water. The BBB would invest billions in building out EV charging networks, electrifying the federal vehicle fleet, building out passenger rail, and improving the climate resilience of critical infrastructure.

Then, too, the legislative proposal includes a “green bank” program to help communities finance renewable energy projects and funds to help rural electric cooperatives transition to renewable energy sources. There is also funding for a Civilian Climate Corps (administered by the Corporation for National and Community Service) and to fund R&D in new green technologies.

Not included in this $550 billion of climate spending and investments is roughly $20 billion of climate-related offsets to be raised from a fee on methane emissions Superfund taxes, and leasing fees for offshore wind energy facilities.

The Fiscal Implications of Climate Action

The major climate provisions in BBB would cost enough to increase the federal debt by 1.8 percent of GDP by 2031 if not offset (the bill did include offsets, as well as numerous budget gimmicks). We estimate a broad $20 per-metric-ton carbon tax, beginning in 2023 and growing one percentage point faster than inflation annually, would generate $650 billion of new revenue through 2031. A similar carbon tax starting at $40 per ton and growing five percentage points faster than inflation would generate $1.55 trillion in the same period.

Importantly, since the BBB climate provisions would lower emissions subject to the carbon tax,the revenue from the tax would be less than if it were enacted on its own. Still, we estimate the $20 per ton carbon tax would be more than sufficient to fully offset the BBB climate provisions’ cost over a decade. The $40 per-ton carbon tax in combination with BBB would raise roughly another $900 billion.

While both versions of the carbon tax would fully fund new climate spending, the more aggressive version would also generate additional revenue, which policymakers could use for a variety of purposes. For example, $900 billion would be enough to reduce debt by 3 percent of GDP in 2031, replace the gas tax and make the Highway Trust Fund permanently solvent, issue a $265 per-person annual rebate or cut the payroll tax rate by 1.2 percentage points.

Both versions of the carbon tax would, in combination with the BBB climate provisions, reduce deficits in the second decade. Since much of the climate spending represents one-time investments and many of the tax breaks are designed to be temporary, costs would decline over time. Meanwhile, carbon tax revenue is likely to continue growing throughout the second decade.

The Environmental Implications of Climate Action

Both the Build Back Better Act’s climate provisions and the carbon taxes we’ve described would reduce net greenhouse gas emissions. Their effects would be even stronger if enacted in combination.

Energy Innovation estimates the BBB climate provisions would reduce 2030 net GHG emissions by around 17 percent compared to a baseline in which emissions reductions fall in response to existing policy interventions, from roughly 5.4 million metric tons of carbon dioxide equivalent (CO₂e) emissions to 4.5 million metric tons. This would bring the United States almost halfway toward its Paris Agreement goal of reducing 2030 emissions to less than 50 percent of 2005 levels.

By comparison, Energy Innovation finds that a $20 per-ton carbon tax, starting in 2023 and growing one percentage point faster than inflation annually (reaching $25 by 2030), would reduce emissions by 14 percent. A $40 per-ton tax, starting in 2023 and growing five percentage points faster than inflation annually (reaching $70 by 2030), would reduce emissions by 21percent. On its own, the more aggressive carbon tax could bring the United States almost three-fifths of the way toward its Paris Agreement goal.

Financing the BBB climate provisions through a carbon tax would further discourage the use of carbon-intensive products and services, encourage the adoption of cleaner alternatives, and incentivize the development of new technologies to reduce net emissions. Energy Innovation finds the combination of a $20 per-ton carbon tax and the BBB climate provisions would reduce 2030 emissions by 25 percent — more than two-thirds of the way to the United States’ ParisAgreement goal. The BBB provisions in combination with the $40 per-ton carbon tax would reduce 2030 emissions by 30 percent — nearly four-fifths of the way toward the Paris Agreement goal.

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Financing the climate-focused provisions in the Build Back Better Act with a tax on greenhouse gas emissions would not only amplify their effect on emissions reductions, but also ensure the climate policies neither add to the national debt, nor rely on revenue and spending provisions that could otherwise be used for deficit reduction.

While climate change represents a serious threat to the security and prosperity of current and future generations, so, too, does our skyrocketing national debt. Lawmakers should commit to addressing the former without exacerbating the latter.